Property Taxes – Analysis - Hampshire County Council

SEEC/SECL
South East Property Tax Devolution
January 2015
Report overview
1. Objectives of the Work
2. Fiscal Balance
3. Property Taxes – Overview
4. Property Taxes – Analysis
5. Conclusions
2
1. Objectives of the Work
 Identify headline property tax figures for the South East, consistent with
the report by the London Finance Commission’s (LFC’s) 2013 report,
“Raising the Capital”.
 Specifically, quantify the values of (i) council tax, (ii) business rates,
(iii) stamp duty land tax, (iv) annual tax on enveloped dwellings, and (v)
capital gains tax on property disposal.
 Estimate total property tax for each local authority in the South East,
based upon assumptions about potential apportionment bases.
 Compare against local authority funding from central government.
3
1. Objectives of the Work
Definitions:
(i) Council Tax – levied on households, based on property value and
occupancy
(ii) Business Rates – levied on non-domestic property, based on rateable
value
(iii) Stamp Duty Land Tax – on ‘land’ transactions, including property
(based on purchase price), leases, rent
(iv) Annual Tax on Enveloped Dwellings – payable by companies,
partnerships, investment vehicles that own high value residential property,
based on property value
(v) Capital Gains Tax on Property Disposal – on the ‘gain’ from the
sale/disposal of property (but note that the LFC only considered property
owned by companies).
4
2. Fiscal Balance
 To provide context, we begin with an overview of the balance between
total tax revenue and total public expenditure in the South East.
 Oxford Economics estimates that, in 2011/12, the South East had
resident-based revenues of £88.5bn, compared to a share of total public
expenditure of £84.0bn.
 This translates to fiscal balance of +£4.5bn, second only to London.
 Since 1999, the South East’s net fiscal contribution has averaged
+£10.2bn per year. This ‘return on investment’ contracted sharply in the
wake of the global financial crisis, and has since partially recovered.
5
6
2011/12
2010/11
Revenues
2009/10
2008/09
2007/08
2006/07
2005/06
2004/05
2003/04
2002/03
2001/02
2000/01
1999/00
£bn Revenue / Expenditure
Fiscal Balance
Figure 1 – South East Fiscal Balance
Expenditure
100
75
50
25
0
-25
7
2011/12
2010/11
100
20
75
15
50
10
25
5
0
0
-25
-5
£bn Fiscal Balance
Revenues
2009/10
2008/09
2007/08
Fiscal Balance (right axis)
2006/07
2005/06
2004/05
2003/04
2002/03
2001/02
2000/01
1999/00
£bn Revenue / Expenditure
Fiscal Balance
Figure 1 – South East Fiscal Balance
Expenditure
Fiscal Balance
 The fiscal balance captures all major sources of tax revenue and public
expenditure in the UK.
 Public expenditure includes services that are typically outside the remit of
local government, such as health care, welfare payments and defence.
 Oxford Economics’ measure of tax revenues include all major revenue
streams, including:
 Income tax
 National Insurance Contributions (NICs)
 Value Added Tax (VAT)
 Corporation tax
 Council tax
 Business rates
8
Fiscal Balance
 An earlier study by Oxford Economics (London’s Finances and Revenues)
included a breakdown of the South East’s tax revenues in 2010/11.
Figure 2 – South East Tax Revenues, 2010/11
4.9%
3.6%
1.6%
0.6%
20.0%
Council Tax
Business Rates
Stamp Duty
Capital Gains Tax*
5.9%
Income Tax
30.6%
NICs
15.1%
VAT
Corporation Tax
17.6%
Other
* Capital Gains Tax also includes financial assets, and so is not a
pure property tax
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Fiscal Balance
 Overall, it showed that property taxes accounted for only 11% of the
region’s total tax take.
Figure 2 – South East Tax Revenues, 2010/11
11%
Council Tax
Business Rates
Stamp Duty
Capital Gains Tax*
Income Tax
NICs
VAT
Corporation Tax
Other
* Capital Gains Tax will also include financial assets, and so is not
a pure property tax
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3. Property Taxes - Overview
 The following sections focus on property taxes in the South East, in the
context of the London Finance Commission’s (LFC’s) report, “Raising the
Capital”.
 The report calls for the devolution of all property taxes. It is argued that
this would increase the capital’s autonomy to invest in infrastructure,
promote economic growth, and increase accountability to local residents
and businesses.
 Specifically, the commission calls for the devolution of:
1. Council tax
2. Business rates
3. Stamp duty land tax (SDLT)
4. Annual tax on enveloped dwellings (ATED)
5. Capital gains property disposal tax (for companies only)
11
Property Taxes – Overview
 LFC concluded that property taxes are well suited to devolution
because:
 They have immobile tax bases
 They are buoyant, increasing over time in line with general economic
growth; and
 They are relatively easy to administer and enforce.
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Property Taxes – Overview
 LFC did not believe that devolution of the other major taxes was
appropriate at this time:
 Income tax could disincentivise employment, create inefficiencies
(due to a mobile workforce) and would be difficult to implement.
 NICs are already ‘ring-fenced’ for nationally administered services,
such as pensions.
 VAT could not be devolved, due to EU requirements that member
states apply common rates within their jurisdictions. It could instead
be assigned (i.e. collected by central government and allocated to
local authorities), but this would be difficult to implement.
 Corporation tax posed a number of challenges, such as volatility,
distortions (e.g. authorities driving away businesses, or engaging in a
competitive ‘race to the bottom’), and difficulty identifying the origin of
the tax revenues.
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4. Property Taxes – Analysis
 Analysis was carried out to estimate property tax yields in the South East
and use assumptions to apportion these to local authority level.
 This section is divided into the following parts:
 Methodology
 Results
 Analysis
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Property Taxes – Analysis
Methodology
Results
Analysis
 When estimating tax revenues at the local authority level, it is necessary
to consider local government structure. Within the South East, there are
four structure types, as illustrated below.
Figure 3 – Local Authority Structure
Fire &
Rescue
County
Council
(no fire)
Fire &
Rescue
County
Council
(with fire)
Shire
District
Shire
District
Type 1
Type 2
Unitary
Council
(no fire)
Type 3
15
Unitary
Council
(with fire)
Type 4
Property Taxes – Analysis
Methodology
Results
Analysis
 Tax revenue data is often only available for shire districts and unitaries. In
this case, we need to estimate how much of the revenue would be
passed on to the other tiers.
Figure 3 – Local Authority Structure
?
?
Fire &
Rescue
County
Council
(no fire)
?
?
Fire &
Rescue
County
Council
(with fire)
Shire
District
Shire
District
Type 1
Type 2
Unitary
Council
(no fire)
Type 3
16
Unitary
Council
(with fire)
Type 4
Property Taxes – Analysis
Methodology
Results
Analysis
 To do this, we need to estimate the shares attributable to the lower, upper
and fire tiers. One approach is to base these share on past service
expenditure. In this case, we have used actual Revenue Outturn 2013/14.*
Figure 3 – Local Authority Structure
Fire
Upper
Lower
Fire &
Rescue
County
Council
(no fire)
Fire &
Rescue
County
Council
(with fire)
Shire
District
Shire
District
Type 1
Type 2
Unitary
Council
(no fire)
Type 3
Unitary
Council
(with fire)
Type 4
* Based on the average for South East England. Only a sub-set of
authorities can be used in these calculations.
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Property Taxes – Analysis
Methodology
Results
Analysis
 The resulting shares, based on past expenditure, are illustrated below. As
can be seen, the majority of expenditure is attributable to the upper tier
(87.5%).
Figure 3 – Local Authority Structure
Fire
Upper
Lower
Fire &
Rescue
County
Council
(no fire)
Fire &
Rescue
County
Council
(with fire)
Shire
District
Shire
District
Type 1
Type 2
Unitary
Council
(no fire)
2.8%
Unitary
Council
(with fire)
87.5%
9.7%
Type 3
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Type 4
Property Taxes – Analysis
Methodology
Results
Analysis
 Council tax revenue is already known for all tiers of local government.
 For business rates and SDLT, revenue was allocated between tiers on
the basis of past expenditure, as described in the previous slides.
 For ATED, figures were only available at the regional level, so population
was first used to estimate the shares for each district/unitary council.
Table 1 – Methods used to allocate notional tax revenue
Regional
amount
District or
Unitary amounts
Fire & County
amounts
Council Tax
Actual
Actual
Actual
Business Rates
Actual
Actual
Stamp Duty Land Tax
Actual
Actual
Annual Tax on Enveloped Dwellings
Actual
Population share
Property Tax
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Past
expenditure
Share
Property Taxes – Analysis
Methodology
Results
Analysis
 Capital gains tax was ultimately excluded from our analysis.
 The LFC report only includes capital gains tax relating to UK residential
properties, worth over £2m, which are owned by companies.
 LFC report that this revenue was worth £25m to the UK in 2013/14, of
which an estimated £20m would be raised in London.
 Any remaining revenues raised by the South East would therefore be
insignificant compared to the other property taxes discussed here.
 An earlier LFC working paper* stated that the devolution of capital gains
tax more widely would be “prohibitively complex”
* London Finance Commission Working Paper ‘Options for Tax
Assignment and Devolution’, September 2012
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Property Taxes – Analysis
Methodology
Results
Analysis
 Overall, property taxes were worth £9.8bn to the South East in 2013/14.
Figure 4 – South East Property Tax Revenues, 2013/14
ATED
£0.01bn
SDLT
£1.84bn
Council Tax
£4.34bn
£9.8bn
Business Rates
£3.65bn
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Property Taxes – Analysis
Methodology
Results
Analysis
 For unitaries and counties, once apportioned, total property tax revenues
ranged from £1,340m (Surrey) to £108m (Isle of Wight)
Figure 5a – Property Tax Revenues (Unitaries & Counties)
1,400
1,200
1,000
800
600
400
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Isle of Wight Council
Bracknell Forest
Portsmouth
Slough
Wokingham
Southampton
Medway
West Berkshire
Swindon
Reading
Central Bedfordshire
Brighton & Hove
Milton Keynes
East Sussex
Wiltshire
Buckinghamshire
Oxfordshire
West Sussex
Hampshire
Kent
0
Windsor and…
200
Surrey
£m
£m
0
Elmbridge
Oxford
Reigate and Banstead
Guildford
Maidstone
New Forest
Wycombe
Crawley
Aylesbury Vale
Waverley
Wealden
Tonbridge and Malling
Basingstoke and Deane
Canterbury
Mid Sussex
Woking
Sevenoaks
Winchester
Horsham
Cherwell
Chichester
South Oxfordshire
Arun
Dartford
Tunbridge Wells
Vale of White Horse
Surrey Heath
Ashford
Mole Valley
East Hampshire
Eastleigh
Test Valley
Spelthorne
Worthing
Thanet
Chiltern
Shepway
Swale
Eastbourne
Havant
Runnymede
Tandridge
Fareham
South Bucks
Hart
Lewes
Rushmoor
Dover
Epsom and Ewell
Rother
West Oxfordshire
Hastings
Gravesham
Adur
Gosport
Property Taxes – Analysis
Methodology
Results
23
Analysis
 For shire districts, property tax revenues ranged from £27m (Elmbridge)
to £7m (Gosport)
Figure 5b – Property Tax Revenues (Shire Districts)
30
25
20
15
10
5
Property Taxes – Analysis
Methodology
Results
Analysis
 We assessed the balance between (i) property tax revenues and (ii) local
authorities’ current funding from central government.
 The objective was to determine whether the devolved property taxes
(excluding council tax) would be sufficient to replace the major grants.
 This includes all grants making up ‘Revenue Spending Power’ in 2015/16,
with the exception of two major ring-fenced grants (Public Health Grant
and Better Care Fund). This also excludes funding for education, police,
and other grants that were not included in Revenue Spending Power.
 Property tax revenues in 2013/14 were projected forward to 2015/16.
Business rates were increased by 1.9% each year (reflecting the
multiplier cap), and SDLT was increased in line with OBR forecasts
(which increase sharply, due to rising property values and transaction
volumes).
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Property Taxes – Analysis
Methodology
Results
Analysis
 By 2015/16, the South East was forecast to have revenues of £6.3bn, vs.
grants of £2.9bn. This gives a ‘funding surplus’ of +£3.3bn.
Figure 6 – Balance of Funding
7,000
£ million
6,000
5,000
ATED
SDLT
4,000
3,000
2,000
Business
rates
Non ringfenced
grants
Surplus
+£3.3bn
Property Taxes
Grants
Surplus
1,000
0
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Property Taxes – Analysis
Methodology
Results
Analysis
 Even including ring-fenced grants, the region would still have a surplus of
+£2.4bn. Business rates alone would almost cover almost all the grants.
Figure 6 – Balance of Funding
7,000
£ million
6,000
5,000
ATED
SDLT
4,000
Ring-fenced
3,000
2,000
Business
rates
Non ringfenced
grants
Surplus
+£2.4bn
Property Taxes
Grants
Surplus
1,000
0
26
27
Isle of Wight Council
Portsmouth
Medway
Results
Southampton
Central Bedfordshire
Slough
Swindon
East Sussex
Bracknell Forest
Brighton & Hove
Wokingham
Reading
Methodology
West Berkshire
Wiltshire
Milton Keynes
Windsor and Maidenhead
Buckinghamshire
Oxfordshire
West Sussex
Kent
Hampshire
Surrey
£m surplus (+) or deficit (-)
Property Taxes – Analysis
Analysis
 Excluding ring-fenced grants, nearly all unitaries and counties would have
a funding surplus in 2015/16 (with the exception of Isle of Wight)
Figure 7a – Funding Surplus (Unitaries & Counties)
800
700
600
500
400
300
200
100
0
-100
£m surplus (+) or deficit (-)
-10
Elmbridge
Guildford
Waverley
Crawley
South Bucks
Mole Valley
Tunbridge Wells
Runnymede
Reigate and Banstead
Chiltern
Surrey Heath
Wycombe
Woking
Winchester
South Oxfordshire
Chichester
Dartford
Vale of White Horse
Hart
Sevenoaks
Horsham
Spelthorne
New Forest
East Hampshire
Tonbridge and Malling
Mid Sussex
Fareham
Eastleigh
Cherwell
Epsom and Ewell
Tandridge
Oxford
West Oxfordshire
Basingstoke and Deane
Rushmoor
Test Valley
Lewes
Ashford
Worthing
Adur
Rother
Maidstone
Wealden
Havant
Eastbourne
Dover
Gosport
Canterbury
Arun
Gravesham
Shepway
Aylesbury Vale
Swale
Hastings
Thanet
Property Taxes – Analysis
Methodology
Results
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Analysis
 For shire districts, 60% would have a funding surplus and 40% would
have a deficit
Figure 7b – Funding Surplus (Shire Districts)
15
10
5
0
-5
Property Taxes – Analysis
Methodology
Results
Analysis
 The preceding slides raise two additional issues:
 Ensuring a fiscally neutral outcome; and
 Equalisation of funding between the South East councils.
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Property Taxes – Analysis
Methodology
Results
Analysis
Fiscal neutrality
 LFC recommended that newly devolved taxes should be offset through
corresponding reductions in grant, to ensure a fiscally neutral outcome.
 As shown on the previous slides, property tax revenue (excluding council
tax) exceeds the South East’s major sources of revenue funding.
 To ensure fiscal neutrality, options include:
 Assume responsibility for funding a wider set of services, e.g. police
and schools
 Return a share of property tax revenue to central government
 Devolve a limited set of property taxes, e.g. business rates, which
would be sufficient to replace most existing, non ring-fenced central
government grants
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Property Taxes – Analysis
Methodology
Results
Analysis
Equalisation
 Based on the assumed revenue splits between the upper, lower and fire
tiers (of 87%/10%/3%), a large number of shire districts would still not be
revenue self-sufficient if property taxes were devolved to the local level.
 This would require equalisation among the South East authorities. This
could take the form of ‘top ups’ and ‘tariffs’, similar to the current business
rates retention scheme.
 At the outset, equalisation could be based on prevailing levels of funding.
However, the region would then need to consider if or how equalisation
would be adjusted to reflect future changes in need; for example, due to
population growth, ageing populations or changes in deprivation.
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Property Taxes – Analysis
Methodology
Results
Analysis
Council Tax
 Finally, it should be noted that our measurement of “surplus” excluded
council tax. This is because council tax is already fully devolved, and is
both collected and retained by the South East.
 Our definition of “surplus” measures the difference between (i) property
tax revenues that are currently collected on behalf of the Exchequer, and
(ii) the amounts that are currently redistributed back to local authorities in
the form of central government grants.
 For completeness, however, we also provide projections of council tax
revenues in 2015/16. As a prudent estimate, we used 2014/15 council tax
requirements, which assumes a 100% uptake of the council tax freeze
that is to be offered in 2015/16.*
* Historically, the take up of council tax freeze grant has ranged
from 65% to 100% of local authorities (nationally) in any given year.
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Property Taxes – Analysis
Methodology
Results
Analysis
Summary of Revenue Streams
 The table below summarises the projected value of all major property
taxes in the South East from 2013/14 to 2015/16, including council tax.
Table 2 – Summary of Actual and Projected Property Tax Values, South East
Property Tax
2013/14
2014/15
2015/16
Council Tax
£4.338 bn
£4.449 bn
£4.449 bn
Business Rates
£3.650 bn
£3.719 bn
£3.790 bn
Stamp Duty Land Tax
£1.845 bn
£2.257 bn
£2.473 bn
Annual Tax on Enveloped Dwellings
£0.010 bn
£0.010 bn
£0.010 bn
Total Property Tax Revenue
£9.843 bn
£10.436 bn
£10.722 bn
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5. Conclusions
 Oxford Economics estimated that the South East generated a fiscal surplus of
£4.5bn to the UK (as at 2011/12).
 Earlier work by Oxford Economics (in 2010/11) identified that property taxes
accounted for 11% of total tax revenues in the South East.
 LG Futures estimates that devolving the property taxes under consideration would
generate revenue of £9.8bn in the South East of England in 2013/14.
 By 2015/16, property tax revenues (excluding council tax) would be £3.3bn
greater than the major non ring-fenced grants currently received by local
authorities from central government.
 Limiting devolution to business rates, rather than all property taxes, could help
ensure fiscal neutrality.
 Given our key assumptions, most counties and unitary authorities would become
revenue self-sufficient. However, ‘equalisation’ would still be needed for a large
number of shire districts.
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